ATF index gauges rise as benchmark lending rate held steady

PBoC opts to keep MLF rate on hold; makes a net injection of 400 billion yuan

ATF index gauges rise as benchmark lending rate held steady
Bonds of SAIC’s GMAC-SAIC venture were among the biggest movers Tuesday.

(ATF) The ATF indexes all crept up 0.01% on Tuesday, as the People’s Bank of China (PBoC) injected 600 billion yuan ($88.5bn) into the banking system via its medium-term lending facility (MLF) at the unchanged rate of 2.95%. 

Overall, the consensus among analysts is that the post-COVID monetary policy cycle is over but that the PBoC will continue to inject liquidity via open-market operations (OMO) to prevent liquidity squeezes.

Tuesday’s action came as China recorded continued momentum in economic activity in August, posting a year-on-year acceleration of industrial production (from 4.8% in July to 5.6% in August), fixed-asset investment (from 6.1% in July to 7.6% in August) and retail sales (from -1.1% in July to 0.5% in August). 

As 200 billion yuan of MLF are maturing on 17 September, the latest OMO amounts to a net injection of 400 billion yuan. This size amounts to a 25 basis point reserve ratio requirement (RRR) cut, implying that Chinese policy makers are worried about the rise of bond yields and other medium- to long-term rates, according to Ting Lu, chief China economist at Nomura, in a research note. 

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The yield of China’s 10-year government bonds currently stands at 3.1% and, given total net financing needs of 2.4 trillion yuan over the next two months, will probably rise further unless the PBoC adds liquidity.  

Lu added that the size of the injection reduces the chance of a RRR cut this year. “The PBoC clearly wants to use a lower-profile tool to add liquidity, and it also wants to put a lid on bank loan growth (RRR cuts will increase loanable funds).” 

Tuesday’s move also signals that the Loan Prime Rate (LPR) will be kept steady at this month’s fixing on 20 September, as the MLF usually acts as a guide for the LPR, set by a panel of commercial banks. However, there is a possibility that the LPR will be lowered even if the MLF rate is unchanged, according to Doctor Tao Wang, Managing Director at UBS, in a research note. 

Within the China Bond 50, the flagship index, the largest price moves were recorded in the bonds of China Merchants Group (+0.54%), Bank of Communications (+0.12%), China Zheshang Bank (+0.1%)  and China Development Bank (-0.1%). Their yields moved by -4.51%, -1.47%, -0.98% and +0.54% respectively.

Industrial and energy names shook up the ATF ALLINDEX Enterprise, with significant moves in the prices of the bonds of China Merchants (+0.54%, as above, for a yield of +4.51%), Shenzhen Metro (-0.65% for a yield of +0.65%) and Chengdu Rail Transit (-0.14% for a yield of +1.29%). 

The bonds of Bank of Communications and China Zheshang Bank, which are also constituents of the ATF ALLINDEX Financial, along with GMAC-SAIC paper, posted the only notable moves of this index. GMAC-SAIC bonds rose 0.07% in price, for a yield of -0.61%.

Meanwhile, the only activity in the ATF ALLINDEX Corporates was that of  Jianxi Provincial Water Conservancy (-0.66% for a yield of +4.08%) and Jizhong Energy Group paper (+0.02% for a yield of +0.01%).